In Re Al Copeland Enterprises, Inc.
MEMORANDUM OPINION
On August 9, 1991, the Court held a hearing on the State of Texas’ Amended Motion for Adequate Protection of Interest in Trust Funds. In its Motion, the State requested that sales taxes collected pre-petition by the Debtor be determined trust funds and be entitled to statutory interest provided by state law until paid. The Debt- or admitted its liability for the principal amount of the taxes owed but resisted any payment of interest and opposed the tax claims’ characterization as a trust fund claim.
This Court has jurisdiction of this contested matter pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a) and (b)(1), 28 U.S.C. § 151, and the standing Order of Reference in this District. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). The Court has considered the pleadings of the parties, the evidence established at the hearing, the briefs of the parties, and the Court’s own independent research. Accordingly, this Memorandum Opinion shall constitute Findings of Fact
Findings of Fact
1. This proceeding was commenced by the filing of a voluntary petition by the Debtor under Chapter 11 on April 12, 1991.
2. The Debtor’s estate owes the State of Texas the sum of $1,059,504.39 by reason of sales taxes the Debtor collected pre-petition from February 25, 1991 to March 24, 1991, which taxes came due and payable post-petition on April 22, 1991. The Debtor’s estate owes the State of Texas $757,646.99 for sales taxes the Debtor collected pre-petition from March 25, 1991 through April 12, 1991, which taxes were due and payable post-petition on May 20, 1991.
3. As the Debtor collected the sales taxes, it deposited them into local bank accounts in the cities where collected. Those accounts were then swept on most banking days into a central clearing account. Ultimately the taxes were placed into a concentration account maintained at Chemical Bank. All funds in the concentration account in excess of projected daily cash needs were then invested in overnight repurchase agreements through an investment account at Texas Commerce Bank— Dallas, N.A. The average interest rate earned by the Debtor on invested funds between April 22, 1991 and August 1, 1991 was five percent (5%).
4. As of April 12, 1991, the Debtor owed no withheld federal income taxes, Federal Insurance Contribution Act taxes, or other known forms of federal “trust fund” taxes.
5. The debtor-in-possession’s failure to timely pay these taxes is not the result of any intentional wrongdoing. The debtor-in-possession has not resisted payment of the principal amount of the tax claims themselves but has only requested that the State obtain authority from this Court for it to pay the same. The debtor-in-possession did not, however, take any affirmative steps on its own to pay the sales tax claims on a timely basis.
6.At the hearing the Court ordered the debtor-in-possession to immediately pay the State the principal amount of the tax claims at issue here, the total sum of $1,817,151.38.
Issues
1. Are the sales taxes collected by the Debtor trust funds, and, therefore, not property of the estate?
2. Is the State of Texas entitled to interest on the “trust fund” portion of its claim?
Conclusions of Law & Discussion
1. Trust Funds. Section 111.016 of the Texas Tax Code grants trust fund status to sales tax receipts in the hands of the party collecting them. Specifically, this section provides that,
“Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected.”
Tex.Tax Code Ann. § 111.016 (Vernon Supp.1991) (emphasis added). The trust language of this section, added effective July 21, 1987, clarified the status of collected sales tax receipts because the Texas Tax Code provision dealing in general with the collection of sales taxes by retailers at the point of purchase does not contain “trust fund” language.
See
Tex.Tax Code Ann. § 151.052 (Vernon 1982).
1
Now, with the amendment of § 111.016, there is no question that collected sales taxes are trust funds.
See In re Gulf Consolidated Ser
This Court is bound by substantive state law on this issue. As such, the Court concludes that the sales taxes collected by the Debtor as set forth in the Findings hereinabove came into the hands of the Debtor as trust funds for the State of Texas.
Since the sales taxes collected by the Debtor were trust funds, then, to the extent they remained in the Debtor’s possession on the petition date, they are not property of the Debtor’s estate. 11 U.S.C. § 541(d);
Begier v. I.R.S.,
“Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States.”
26 U.S.C. § 7501 (1986).
The Supreme Court concluded that this language creates a trust at the time of the withholding.
Begier,
Begier was a preference case in which the trustee attempted to recover the Debt- or’s pre-petition payment of trust fund taxes to the IRS from its general, non-segregated monies. In construing Congress’ intent behind § 541(d) of the Bankruptcy Code, the Supreme Court concluded that
“the limitation that the funds must ‘have been properly held for payment’ is satisfied ‘if the debtor is able to make the payments’.”
Id.
Further, even though the trust funds had been commingled with the debtor’s own money, “the debtor’s act of voluntarily paying its trust fund obligation therefore is alone sufficient to establish the required nexus between the ‘amount’ held in trust and the funds paid.” Id. at 2267. The result was that the trustee was unable to recover the alleged preference since the payment in question was not a transfer of property of the debtor, but a transfer of the res of the trust to its beneficial owner. Id.
The result in
Begier
and the rationale the Supreme Court used to reach this result is consistent with pre-existing trust law which had held that “the beneficiary may trace those [trust] assets and recover them from anyone but a bona fide purchaser for value.”
In re Mahan & Rowsey, Inc.,
The language of § 7501 of the Internal Revenue Code is similar to that of § 111.016 of the Texas Tax Code; therefore, a compatible application of
Begier
and
Mahan & Rowsey
requires that the State of Texas prove that the trust funds were collected by the Debtor, that on the date of the filing of this Chapter 11 proceeding, April 12, 1991, the Debtor had sufficient funds on hand equal to or in excess of the amount of such trust funds, and that, at all times during the interim period between collection and filing for bankruptcy, the Debtor had sufficient funds on hand to fully pay the trust fund claims. This latter requirement is imposed because if the balance of cash on hand on any interim day was less than the amount of the trust fund claims, then the trust fund claims are limited to that “lowest intermediate balance.”
The evidence produced at the hearing established that the sales taxes were collected by the Debtor. Further, the State properly identified the Debtor’s various bank accounts into which the sales taxes were deposited and then traced them into their ultimate repository, the’ concentration account at Chemical Bank from which the nightly repurchase agreements were purchased at TCB. Further, the Debtor’s daily combined cash balances during the time period in question, from the date of collection to the date of the petition, never dipped below the amount of the State’s sales tax trust fund claims on those days, and the funds existed on the petition date. The lowest intermediate balance rule is satisfied in this case. The State has, therefore, sustained its burden of proof.
The Court concludes that the sales taxes owed to the State of Texas in the amounts of $1,059,504.39 [for sales taxes the Debtor collected from February 25, 1991 to March 24, 1991] and $757,646.99 [for sales taxes the Debtor collected from March 25, 1991 through April 12, 1991] were collected by the Debtor in trust for the benefit of the State of Texas. Further, the lowest intermediate balance rule is satisfied in this case, and the Debtor had sufficient cash on hand as of the petition date to fully pay the trust fund claims. As such, $1,817,151.38 of the cash in the possession of the Debtor as of the date of the filing of this case [a sum equal to the trust funds claims] is not property of the Debtor’s estate but is property held by the Debtor’s estate in trust for its beneficial owner, the State of Texas.
2.
Interest.
It is without dispute that § 63(a) of the former Bankruptcy Act had the effect of disallowing post-petition interest on unsecured pre-petition claims, including tax claims. 3
Collier on Bankruptcy
para. 502.02[2] & 502.02[2][a], at 502-30 to 502-37 (15th ed. 1991). In 1949, the United States Supreme Court held that unsecured tax claims should be treated no differently than other unsecured claims under the Bankruptcy Act and post-petition interest would be disallowed.
Id.
para. 502.02[2][a], at 502-37 (citing
City of New York v. Saper,
Prior to the enactment of the Bankruptcy Code, the Supreme Court had clearly established the non-dischargeability of, and therefore, the collectibility of, interest which accrued after a bankruptcy filing on non-dischargeable tax liabilities.
See Bruning v. United States,
These cases, however, are not applicable to the issue facing this corporate debtor. Here, the Court must determine whether interest on the pre-petition tax claim is collectible
from the estate,
not whether the debtor will be liable for the same once it is reorganized. The latter would be a relatively easier question to answer as a Chapter 11 debtor is ordinarily discharged by the confirmation of its plan “from
any
debt that arose before the date of such confirmation.” See 11 U.S.C. § 1141(d)(1)(A). Dischargeability actions under § 523 do not lay against a corporate debtor reorganizing under Chapter 11.
In re Push & Pull Enterprises, Inc.,
Additionally, the cases involving individual debtors dealt with tax claims in situations in which no trust
res
existed. As such, they dealt with unsecured claims under § 501 of the Code upon which § 502(b)(2) specifically disallows post-petition interest as a claim against the estate. That is not the case at hand. Here, the State has a trust fund claim. It does not have an unsecured tax claim governed solely by the provisions of 11 U.S.C. §§ 501 and 502. As of the petition date, the Debtor held property of the State, to-wit: cash in an amount equal to the State’s trust fund claim. Therefore, the State’s claim does not fall within the operation of §§ 501 and 502 of the Bankruptcy Code, and, as such, it is entitled to post-petition interest.
See In re Goldblatt Bros. Inc.,
This conclusion is also consistent with the legislative history of § 541 of the Bankruptcy Code which shows that Congress intended § 541(d) to exclude third party claims for trust funds from the operative provisions of the Code dealing with claims allowances. In drafting the new Bankruptcy Code provision defining property of the estate, Congress directly attacked a prior United States Supreme Court ruling which had denied trust fund status to taxes withheld or collected prior to the time of filing.
Begier,
The Debtor argues that because it is not guilty of any “wrongdoings,” it should not be required to pay interest on the trust fund claims. However, the Court does not see the logic of this reasoning. The Debtor did not timely remit such funds to the State. The mere fact that the Debtor has preserved the trust funds (and did not use the money for other purposes) is no reason to relieve it of the obligation to pay interest. Payment of interest on delinquent trust funds is specifically authorized by
There is no state law provision which requires payment of interest for the sixty (60) day period immediately following the due date. Therefore, outside of bankruptcy, no interest accrues until this sixty (60) day period has elapsed. However, separate from the charging of interest, outside of bankruptcy the State is able to collect a penalty during that initial sixty (60) day period. Section 111.061 of the Texas Tax Code provides that a penalty equal to five percent (5%) of the tax is imposed on a person who fails to pay the same when due with an additional five percent (5%) being imposed thirty (30) days thereafter. Accordingly, failure to timely pay a sales tax can result in up to ten percent (10%) in penalties before interest begins to accrue. In the context of a bankruptcy case, however, penalties on pre-petition tax obligations are not generally recoverable in bankruptcy cases because 11 U.S.C. § 726(a)(4) subordinates pre-petition penalties to unsecured claims. Nevertheless, equity demands the State be compensated for the debtor-in-possession’s failure to timely pay these trust fund claims. Accordingly, the State is entitled to interest from the date the taxes became due until sixty (60) days thereafter at the rate the debtor-in-possession actually earned on the State’s money during that time.
See In re Goldblatt Bros., Inc.,
Section 111.060 of the Texas Tax Code provides that 10% interest shall accrue on delinquent taxes beginning sixty (60) days from the date due. The State is entitled to interest on $1,059,504.39 at the rate of 10% per annum from June 21, 1991 until the date the debtor-in-possession paid the same. Further, the State is entitled to interest on $757,646.99 at a rate of 10% per annum from July 19, 1991 until the date paid by the debtor-in-possession.
Conclusion
The sales tax claims of the State of Texas are trust fund claims. Of the total cash the Debtor possessed on the petition date, an amount equal to these trust fund tax claims is the property of the State of Texas. These claims are entitled to interest at the rate of five percent (5%) per annum, the rate the Debtor earned upon such amounts, from the due date of such taxes until sixty (60) days thereafter and at a rate of ten percent (10%) per annum from that latter date until paid.
Counsel for the State is directed to prepare an order implementing the decision contained in this Memorandum Opinion and which specifically sets forth the exact amounts of the interest calculated as directed in this Opinion. If there is a dispute with regard to such interest amounts, counsel for the State is directed to file a Motion
Notes
. This section states
(a) A seller who makes a sale subject to the sales tax imposed by this chapter shall add the amount of the tax to the sales price, and when the amount of the tax is added:
(1) it becomes a part of the sales price;
(2) it is a debt of the purchaser to the seller until paid; and
(3) if unpaid, it is recoverable at law in the same manner as the original sales price.